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Insurance for Low-Probability Hazards: A Bimodal Response to Unlikely Events

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  • McClelland, Gary H
  • Schulze, William D
  • Coursey, Don L

Abstract

Two insurance experiments using real-money consequences and multiple rounds to provide experience are described. In the first experiment, subjects bid for insurance to prevent a fixed loss of $4 at probabilities ranging from .01 to .9. Mean bids were near expected value except at the lowest probability of .01, for which a very bimodal distribution was observed (some subjects bid zero and others bid much more than expected value). A second experiment explored this bimodality at a probability of .01 with loss increased to $40. A similar bimodal distribution was obtained that persisted over 50 rounds of experience. These laboratory results are consistent with field evidence for low-probability hazards, for which people appear either to dismiss the risks or to worry too much about them. Copyright 1993 by Kluwer Academic Publishers

Suggested Citation

  • McClelland, Gary H & Schulze, William D & Coursey, Don L, 1993. "Insurance for Low-Probability Hazards: A Bimodal Response to Unlikely Events," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 95-116, August.
    • Handle: RePEc:kap:jrisku:v:7:y:1993:i:1:p:95-116
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